“They’re committed to ensuring that there is not another taper tantrum,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. The goal in reinforcing low rates and a steady course for asset purchases, she added, is “to talk down the market.”
Fed officials and private forecasters are projecting a strong pickup in economic activity once vaccines become widely available. They have also acknowledged that inflation is likely to move higher in 2021, because of short-term technical factors, and that a short-lived spike in price increase would not necessarily worry Fed policymakers.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a Bloomberg television interview earlier on Thursday that temporary jumps in inflation would not necessarily signal that tepid price gains — the problem of the modern economic era— were a thing of the past.
“It’s quite possible that we’ll see some spikes above 2 percent. In fact, the math of inflation would suggest that we’ll get some spikes in the middle of the year,” she said. “That’s not a victory on price stability.”
Mr. Powell also acknowledged that inflation could increase temporarily, but said the bounce would be “very unlikely” to lead to persistently faster gains. If inflation does pick up substantially, the Fed knows how to use policy to counteract that.
“Too-low inflation is the much more difficult problem to solve,” he said.
He reiterated that the Fed, which has made a habit of lifting interest rates to prevent overheating in the labor market, would no longer do that — instead allowing the job market to continue to tighten so long as excesses do not appear.
“We saw the social benefits that a strong labor market can and did bring,” Mr. Powell said, referring to the last business cycle, in which unemployment dropped to 3.5 percent but wage and price increases remained tame. “One of the big lessons of the last crisis was how much room there was in labor force participation.”
And he said he believed that the economy could return to its pre-crisis levels.
“I’m optimistic about the economy over the next couple of years, I really am,” Mr. Powell said. “We’ve got to get through this very difficult period this winter, with the spread of Covid.”